Dr. Kohl Quarterly Articles

Do you have the sixth C of credit?

Agricultural lenders often use the five Cs of credit as a framework for determining acceptance or denial of a loan request and to evaluate overall risk when they price a loan. The five Cs are cash flow, capital/collateral, conditions, capacity and character. While these five Cs are important criteria for credit, a sixth C is very important in terms of management, which frequently makes a difference in the five Cs of credit. The sixth C is the cranium, a term used by a well-respected ag lender at a lending school a number of years ago. Since then as I have interacted with many different producers, I have seen how the cranium has set one group of producers above the rest.

Jimmy Johnson, Dallas Cowboys’ football coach, was quoted as saying, “If you’re going to talk the talk, you’ve gotta walk the walk.” Farming, as in football, is all about strategy and execution. A term that I use in assessing management ability is HUT: Hear, understand and take action. I find a number of producers will hear what is being said, but many have difficulty assimilating the information into strategy, and even more have a difficult time executing and following thru. A marketing plan is a classic example. How often do individuals shoot for a home run in marketing rather than execute and take a profit. In other cases, a line of credit or excess cash is used to purchase land or equipment, which results in cash being tied up so operating expenses cannot be met or, worst of all, lines of credit cannot be paid down.

Another aspect of the sixth C from a lender’s standpoint is how the customer handles adversity. This year will be a test case for this component of the sixth C. The cut above producer is proactive at handling problems and issues, seeking advice and counsel, and, in turn, maintaining open lines of communication. Lenders will often tell me in informal discussion about two types of customers they dread: the “know it alls” who will not listen and take advice and the “victims” who always blame circumstances and individuals for their problems.

A fine line on the sixth C is knowing cost of production by enterprise and being insightful enough to have sufficient levels of insurance on crops, the business, and individuals. Those with a high “cranium factor” are often good mentors who find ways to assist individuals and give back to the community also.

The next time you assess yourself, a neighbor, or a client, think about the sixth C, the cranium. More than likely if an individual has strengths in the aforementioned areas, they will also be strong in the five Cs of credit.